Will history repeat itself?

Looking historically, Sensex has given negative returns in even years in the month of May. Is history going to repeat itself?

There is an old Wall Street axiom that stock market investors should sell in May and go away. This refers to the historical underperformance of stocks in the US markets. How significant is this in Indian stock markets at current juncture? 

 To say the least, we are in a big mess. As we all know that the state of the domestic stock market is largely decided by the foreign investors. If they are not feeling good about things, the Indian stock markets are not likely to go anywhere. The enthusiasm that propelled Indian markets at the start of year 2012 is fizzling, as investors see big challenges ahead but there is very little confidence that policymakers would be able to manage them well.

 There are a number of domestic headwinds as of now which are pushing foreign investors to view the country with a negative bias. The biggest risk as of now is the price of crude oil. Weak investment cycle is another big concern. Experts say that this may not only affect consumption, but also the future employment potential. That could in turn affect economic growth. There is concern over fiscal deficit. With subsidies rising, the possibility of fiscal deficit coming under control is under question. The rupee is under pressure because of the current account deficit and capital flows, which have been volatile.

 There has been a significant slowdown in terms of FII flows and GAAR is also adding to the confusion. So FII flows will continue to be weak due to local issues as well as due to global liquidity. All the trouble seems to be concentrated in Spain these days. Other European countries are not doing too well either. That will certainly have an impact on the Indian markets as well.

 But there are a few positives as well. As far as valuations of Indian markets are concerned, the valuation is now comfortable at 13x FY13 earnings, which is close to the historical average. On the companies side the balance sheet are much stronger than they were in 2009. Softening of commodity prices, manageable inflation levels and a pick-up in the investment cycle can lead to an upside.

 Looking historically, Sensex has given negative returns in month of May in even years. In the month of May, Sensex fell 4.81 per cent in 2000, dipped 6.36 per cent in 2002 and nosedived 15.8 per cent in 2004. The trend continued in later years as well. Sensex dipped 12.26 per cent in 2006, 5.04 per cent in 2008 and 3.5 per cent in 2010 in May. What is going to happen this May? Will history repeat itself?

 If we look technically, 5350 has acted as a strong supply level for Nifty on the higher side. Downward targets in this case are 5,036 and 4,848. Key medium-term support for the index remains at 4,950 and investors need to get worried only if it goes on to record a strong weekly close below this level.

(Published in Money Mantra)